Exercise 12-2 Net Present Value Analysis [LO12-2]

The management of Kunkel Company is considering the purchase of a $20,000 machine that would reduce operating costs by $5,000 per year. At the end of the machines five-year useful life, it will have zero salvage value. The companys required rate of return is 13%.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.

Required:

1. Determine the net present value of the investment in the machine.

2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?